TT278: Could your Company be Guilty of a Tax Evasion Related Offence?

September 26, 2018

Background

In its 2015 election manifesto the Conservative Party pledged to:-

“Make it a crime if companies fail to put in place measures to stop economic crime, such as tax evasion.”

That pledge found its way into law in the form of the Criminal Finances Act 2017, the effects of which have been with us for almost a year. It is timely then to re-examine the legislation to consider how it might impact on businesses, particularly in the SME sector.

Who is affected?

Part 3 of the Criminal Finances Act 2017 deals with “corporate offences of failure to prevent facilitation of tax evasion” and it is important to emphasize just what this is aiming at. Tax evasion is a crime perpetuated by individuals either on their own account or for others or for organisations / companies. The legislation of 2017 creates new offences in certain circumstances so that an organisation could be guilty by virtue of having failed to prevent another person facilitating the commission of a tax evasion offence. Conviction of such an offence can lead to an unlimited fine and, perhaps more importantly at a time where, rightly, tax evasion is seen as increasingly intolerable, a damaged reputation. That reputational damage could have a severely detrimental effect on the ability of a business to operate in certain markets.

The types of organisations that are the target of the legislation are companies and partnerships (including both limited liability partnerships and Partnership Act 1890 style partnerships), and are referred to collectively in the legislation as “relevant bodies”.

Offences

Before the Criminal Finances Act 2017, to secure a conviction beyond the individual or individuals directly concerned, prosecutors would have had to demonstrate that senior members of an entity were involved in or aware of the illegal activity. This was difficult to demonstrate and in fact encouraged poor governance through excessive delegation in areas where delegation was inappropriate. Under the new regime the offence is the “failure to prevent” criminal evasion and it requires the presence of three distinct elements:-

a criminal evasion of tax by an individual;

criminal facilitation of the evasion by an associate of a relevant body acting in that capacity; and

failure by the relevant body to prevent its associate from committing the criminal facilitation.

In this context, an associate could be an employee or an agent performing services for or on behalf of the relevant body, but it is important that they were acting in their capacity as agent for the offence to be present. Thus, an employee at work advising their employer and thereby facilitating the commission of tax evasion would constitute one of the three elements for an offence at the level of the relevant body, but the same individual similarly advising his friends in a private capacity would not.

The key issue is what it means for a relevant body to have failed to prevent its associate from committing the criminal facilitation, and what it could have done to avoid that failure.

Defence

It is a defence under the legislation that the relevant body has put in place “reasonable prevention procedures” to prevent its associates from committing tax evasion offences. It is also a defence if the relevant body can show that it was not reasonable in all the circumstances to expect that relevant body to have prevention procedures in place.

Whilst it is tempting to consider appealing under the second of the two defences, HMRC guidance gives specific advice for SMEs, so it is clear that HMRC will consider that the second defence would be unavailable in most cases.

It is likely, then, that for a defence to be reliable, an SME would need to be able to demonstrate it had in place reasonable prevention procedures. HMRC guidance specifies six “guiding principles” around which prevention procedures should be based. These principles are as follows:-

Risk assessment

Proportionality

Top level commitment

Due diligence

Communication and training

Monitoring and review

In an SME context, and in the light of these principles, the following might be viewed as the skeleton of “reasonable prevention procedures”:-

A well-documented policy for the entity setting out its commitment to the prevention of tax evasion, endorsed by the principles; such policy is communicated to staff and customers (possibly by inclusion on the entity’s website).

Contract provisions for employees and agents alike setting out a zero-tolerance attitude to tax evasion.

A comprehensive and regular staff training programme on the issue.

Clearly documented whistle-blowing procedures for staff and agents to follow together with an architecture within the organisation to deal with whistle-blowers.

The discouragement of bonus cultures based on high risk activity.

Rigorous enforcement and regular review of these procedures.

Next Steps

This is a strict liability offence. That means that if the first two elements of an offence are present (see above under “Offences”) the new offence will have been committed unless the relevant body can show that it had reasonable prevention procedures in place.

That could be your company or your partnership and the financial or business consequences of that failure could be very severe indeed.

If you would like to talk to us about implementing a suitable strategy in the area, please call your Barnes Roffe contact partner.